Jagjeet Jai and his wife Jiera, operate a partnership through a caf business, J&J Jai trading as

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Jagjeet Jai and his wife Jiera, operate a partnership through a café business, J&J Jai trading as Jasmine Chai Delights (JCD).

JCD is located at St Kilda near the beach and specialises in refreshing beverages for summer and hot curries and roti for the cold winter. Jagjeet and Jiera engage your services for the preparation of their 2019/20 partnership tax return.

On 7 September 2020 Jagjeet and Jiera send you the email below:

From: Jagjeet & Jiera Jai

Sent: Tuesday, 8 Sept 2020, 12:10 pm

To: Tax Accountant

Subject: Partnership Tax return 2019/20 - J&J Jai T/A Jasmine Chai Delights

Dear Tax Accounting Team,

Thank you for catching up with us last week. We ask that you please prepare our partnership's tax return.

You see, we intend to lodge our own personal tax returns on my.gov.au, so we will wait your advice about our partnership share of income to be included in our tax returns.

This is because, we already know how to use taxcalc.com.au and should have a reasonable approximation of our tax liability. In addition, the Commissioner of Taxation issues a Notice of Assessment, so our tax liability will be confirmed when we receive that.

Below, we provide relevant details that should be of assistance to you in the preparation of our Partnership's Tax Return for the 2020 income year.

Partnership Tax Return

1. Café income

I am sure you are very well aware of the nature of our business having visited the famous St Kilda beach before. We are a café that specialises in providing amazing drinks, particularly tea based, to quench our customer's thirst in summer, and we also provide great restaurant standard food, specialising in home made Indian curries and Roti and spicy dips. For last financial year we received sales of $300,000 (cash and credit) and we had a party to celebrate the end of the financial year, and so our credit card sales not received in our account were $5,000 (yeah, but we don't need to include that given we are a micro cash business), Purchases for the year were $50,000, Opening stock was $5,000 (we had just got a delivery on 30 June) and our closing stock after the party was only $1,000. We had a number of bills on the table to pay for on 30 June which we calculated to be $10,000.

2. Investment Earnings

Grandma left Jagjeet some shares she owned in India. Unfortunately, the solicitor took so long in dealing with the estate and its administration, that the shares were finally changed into his name in July. The good thing was the solicitor paid us the net dividends to our joint business account, which to be honest, I know we need to declare, but he said that we actually got $2,000 with $400 dividend withholding (whatever that means), and that is why we only got net dividends of $1600 on 30 June. But I am sure you can work out what all that means.

In addition, our partnership received interest of $250 in our joint business bank account from the local Jolimont Bank. Furthermore, grandma had left Jagjeet some cash, and he purchased some investments and put them into our joint names. Accordingly, we purchased shares in a blue chip public company but Jagjeet had a friend who was keen to start up a new business, so we also invested into his small business. Very Small Co P/L that paid us 2 sets of dividends, being $2000 unfranked and then fully franked dividends of $4350 while Large Co Ltd paid a dividend of $5,250, being 40% partially franked. These dividends were paid to our joint business account as we had instructed.

3. Business expenses

Well this is the easy part, listing all of our expenses which are fairly clear.

· Running Costs (Rent, Gas, Power) $25,000

· Casual wages (market rate) paid to Jasmine and her friend Jane (both 16 years old) $5,000

· Entertainment $500

· Last year's H&R Block Tax agent expense $2,000

· Provision for Doubtful debts $1,200

· Theft (a grab and run from our cash register while we weren't looking

- reported to police) $500

· Donation - Purchase of 20 Royal Melbourne Hospital lottery tickets $500

· Prior year losses $800

· Superannuation contributions ($5,000 for each of us) $10,000

4. Interest, salaries, drawings

Jagjeet receives $1,000 interest from the partnership, which is fair because he set up the business making the contribution to purchase the various plant and equipment and original fit-out with the money his Grandpa had left him. In addition, we each drew down a salary of $45,000 and on one occasion Jiera withdrew $2,000 from the business to help pay for a relative's funeral expenses.

5. Depreciation & Repairs

We had a number of repairs that needed attention - like the air conditioning wasn't working properly so we had to replace it with a new unit at a cost of $3,500 including installation. The written down value of our Small Business Pool at 30 June 2019 was $35,000. Finally, we knocked out the wall at the back of our shop and put up a wall further back so that allowed us to double the size of shop making it so much more inviting. All up the costs to double our shop front including painting were really cheap, only $6,000. The wall was completed on 1 March 2020.

6. Purchase of new Van

With our view to expanding, and more so the impact of CoVid necessitating deliveries, we purchased a Van costing $50,000 on 1 March 2020 for 100% business use, and housed it in front of the café as advertising. The registration was $800 and insurance $1500, petrol was $8000, the services were covered under warranty.

7. CGT on sale of building

We purchased our shop for $100,000 with associated costs at the time of $5,000 but it has been compulsorily acquired by the government, and we have a long settlement, and we will be paid $500,000 without any associated costs as they were paid for by the government. We signed the contract on 30 June 2020. We will receive monies on 1 December 2020, so there has been no need to move just yet. We purchased the shop on 19 September 1985.

8. Taxable income and tax liability of my company

Based on the above information, what would be the net partnership income and how will that be

distributed to us.

That should be all you need for your deliberations. We look forward to hearing back from you about our partnership's completed income tax return, and consequent impact on us.

Thank you very much.

Kind regards,

Jagjeet and Jiera Jai

J&J Jai Trading as Jasmine Chai Delights

9. Your advice

Oh look, there is something we would really appreciate your advice about. We are contemplating changing our partnership arrangement which was very easy to set up and not at all costly. We are thinking about transferring to a company structure because our future hope is to expand the business, and also franchise our speciality tea. We would love to see one our business in many of Melbourne's inner city suburbs. But if we expand the business we lose control in management terms, and feel our liability with customers is somewhat put at risk.

In moving to this different structure we will need to invest in management, and so we would feel more comfortable about adopting a limited liability. We are aware of the increased cost exposure as a once off formation expense, but also there are ongoing costs including registration fees and auditing fees. But there is more flexibility, particularly as Director/employees.

So all of that explains our motivations and our awareness of the costs and benefits, but we want to also consider the impacts regarding taxation. We really have no idea about the tax consequence of moving to a corporate structure in comparison to our current partnership structure.

Could you please advise the financial impact of moving from a partnership to a company structure, perhaps by using this year's figures re net partnership income. As you know, our ownership is joint, and so applies equally to both structures. We have no other income or deductions to claim, other than what we have mentioned above. Could you highlight if there is a difference and why?

Finally, in terms of your advice our focus is on the figures, not so much a nice letter, and the technicalities like the law. So we would appreciate your advice to be clear and concise, and easy to understand. Our dominant interest is about the figures and their taxation impact..

Required